<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28004
EAGLE RIVER INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1320277
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1060 WEST BEAVER CREEK BOULEVARD
AVON, COLORADO 81620
(Address of principal executive offices) (zip code)
(970) 845-8300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 14, 1996
----- --------------------------------
Common Stock, $.001 par value 13,206,936 shares
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<PAGE> 2
Eagle River Interactive, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1996
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations for the Three and Nine Months Ended 4
September 30, 1996 and 1995
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 5
30, 1996 and 1995
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................................... $ 35,333 $ 2,595
Accounts receivable, net........................................................ 4,557 3,606
Other current assets............................................................ 4,109 1,132
---------- ------------
Total Current Assets....................................................... 43,999 7,333
---------- ------------
Property and Equipment, net........................................................ 7,710 2,825
Other Assets, net.................................................................. 5,584 3,495
---------- ------------
Total Assets ...................................................................... $ 57,293 $ 13,653
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable................................................................ $ 1,393 $ 1,473
Accrued liabilities............................................................. 3,446 2,144
Other current liabilities....................................................... 2,007 2,580
Current portion of note payable and capital lease
obligations.................................................................. 113 857
---------- -----------
Total Current Liabilities.................................................. 6,959 7,054
Note Payable and Capital Lease Obligations......................................... 1,192 3,243
---------- -----------
Total Liabilities.......................................................... 8,151 10,297
---------- -----------
Mandatorily Redeemable Convertible Series A Preferred Stock $0.001 par value,
1,342,000 shares authorized, issued and outstanding at December 31, 1995
(Note 3)....................................................................... -- 6,898
Stockholders' Equity (Deficit):
Common stock, $0.001 par value, 30,000,000 shares authorized; 13,201,447 and
4,847,448 shares issued and outstanding as of September 30, 1996 and
December 31, 1995, respectively.............................................. 13 4
Deferred Compensation.......................................................... -- (18)
Additional Paid-In Capital..................................................... 54,842 737
Accumulated Deficit............................................................ (5,713) (4,265)
---------- -----------
Total Stockholders' Equity (Deficit)....................................... 49,142 (3,542)
---------- -----------
Total Liabilities and Stockholders' Equity......................................... $ 57,293 $ 13,653
========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue........................................... $ 9,913 $ 4,062 $ 25,557 $ 14,842
Operating Expenses:
Cost of revenue.................................. 6,559 2,367 15,011 8,136
Marketing and selling............................ 3,567 1,381 8,576 3,786
General and administrative expenses.............. 4,414 1,000 8,108 3,075
Depreciation and amortization.................... 603 257 1,414 725
----------- --------- ---------- ---------
Total Operating Expenses............... 15,143 5,005 33,109 15,722
----------- --------- ---------- ---------
Net Operating Loss................................ (5,230) (943) (7,552) (880)
Other Income (Expense), net....................... 525 (204) 1,162 (501)
----------- --------- ---------- ---------
Loss from Continuing Operations
before tax benefit............................. (4,705) (1,147) (6,390) (1,381)
Tax benefit....................................... 1,869 - 2,624 -
----------- --------- ---------- ---------
Loss from Continuing Operations................... (2,836) (1,147) (3,766) (1,381)
Discontinued Operations........................... - - 198 (644)
----------- --------- ---------- ---------
Net Loss.......................................... $ (2,836) $ (1,147) $ (3,568) $ (2,025)
=========== ========= ========== =========
Net Loss from Continuing Operations Per Common and
Common Equivalent Share......................... $ (0.21) $ (0.18) $ (0.32) $ (0.21)
=========== ========= ========== =========
Discontinued Operations Per Common and Common
Equivalent Share................................ $ - $ - $ (0.02) $ (0.10)
=========== ========= ========== =========
Net Loss Per Common and Common Equivalent Share... $ (0.21) $ (0.18) $ (0.30) $ (0.31)
=========== ========= ========== =========
Shares used in Computing Net Loss per Common and
Common Equivalent Share......................... $13,201,477 6,532,618 11,921,605 6,479,204
=========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,568) $ (2,025)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................................... 1,414 725
Write-off of Product Technology......................................................... - 119
Reserve for bad debts................................................................... 30 25
Loss on disposal of property and equipment ............................................. 57 -
Deferred compensation .................................................................. 168 200
Deferred tax benefit ................................................................... (2,664) -
Changes in assets and liabilities:
Accounts receivable................................................................ (981) 704
Other current assets........................................................................ (2,117) 109
Other assets....................................................................... (568) (19)
Accounts payable, accrued liabilities and other liabilities........................ 649 (883)
---------- ----------
Net cash used in operating activities........................................... (7,580) (1,045)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................................... (5,480) (1,157)
Advances to affiliates.................................................................. (53) -
Acquisition of shares................................................................... (352) -
Cash paid for acquisitions.............................................................. - (1,003)
---------- ----------
Net cash used in investing activities....................................................... (5,885) (2,160)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit........................................................... 1,250 2,000
Repayment of lines of credit............................................................ (1,250) (2,159)
Proceeds from notes payable............................................................. 490 875
Repayment of notes payable.............................................................. (3,812) (988)
Distributions to shareholder............................................................ (1,144) (95)
Proceeds from preferred stock........................................................... - 6,000
Proceeds from issuance of common stock, net............................................. 50,669 -
---------- ----------
Net cash provided by financing activities.......................................... 46,203 5,633
---------- ----------
Net increase in cash and cash equivalents................................................... 32,738 2,428
---------- ----------
Cash and cash equivalents, beginning of period.............................................. 2,595 907
---------- ----------
Cash and cash equivalents, end of period.................................................... 35,333 3,335
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................................................... $ 168 $ 676
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company creates, develops and deploys interactive solutions that assist
companies in sales, marketing, training and corporate communications. The
Company develops these business solutions through the use of custom and
product solutions. Custom solutions are delivered using the Internet and World
Wide Web, informational and transactional kiosks, CD- ROMs, and other
interactive medium. Product solutions are generated by providing
instructor-led Windows NT and Windows 95 operating system training seminars and
on-site workshops, computer-based training media, interactive software, videos
and newsletters. The Company also offers traditional outdoor media advertising
at ski resorts in the United States.
Basis of Presentation
The accompanying consolidated condensed interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying consolidated
condensed interim financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Registration
Statement on Form S-1 (No. 333-702) as amended (the "Registration Statement").
The accompanying unaudited consolidated condensed interim financial statements
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions. Such
estimates and assumptions affect the reported amounts of assets and liabilities
as well as disclosure of contingent assets and liabilities at the date of the
accompanying consolidated condensed financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The results of operations for the interim
periods are not necessarily indicative of the results for the entire year.
Certain prior year balances have been reclassified to conform to the current
period presentation.
2. MERGERS
Graphic Media, Inc.
On June 21, 1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger of a wholly owned subsidiary with Graphic Media, Inc.
("GM"), an Oregon corporation. As a result of the merger, GM became a wholly
owned subsidiary of the Company.
In connection with the merger, each outstanding share of GM common stock was
converted into 0.27 of a share of ERI common stock with all the outstanding
shares of GM common stock being exchanged for 550,000 shares of ERI common
stock. Prior to the conversion, a dissenting GM shareholder was paid
approximately $352,000 as consideration for her approximate 3% interest in GM.
In addition, the Company assumed and exchanged all options to purchase GM
common stock for options to purchase 141,041 shares of ERI common stock.
The merger was accounted for as a pooling of interests, and, accordingly, the
historical consolidated financial statements for the two companies for periods
prior to consummation of the merger have been restated as though the companies
had been combined for all periods reported herein.
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<PAGE> 7
EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Mastering Computers, Inc.
On July 31,1996, pursuant to an Agreement and Plan of Merger, the Company
completed a merger of a wholly owned subsidiary with Mastering Computers, Inc.
("Mastering"), an Arizona corporation. As a result of the merger, Mastering
became a wholly owned subsidiary of the Company.
In connection with the merger, all outstanding shares of Mastering common stock
were exchanged for an aggregate of 1,175,000 shares of ERI common stock. The
Company also assumed and exchanged all options to purchase Mastering common
stock for options to purchase 191,280 shares of the Company's common stock.
The merger was accounted for as a pooling of interests. Merger costs, which
primarily consist of financial advisory fees, outside legal and accounting
fees, and costs of consolidating certain operational and administrative
functions of the companies are expensed as incurred.
The merger was accounted for as a pooling of interests, and, accordingly, the
historical consolidated financial statements for the two companies for periods
prior to consummation of the merger have been restated as though the companies
had been combined for all periods reported herein.
The following table provides a reconciliation of revenues and earnings reported
by the Company to the combined amounts presented for the period indicated (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(Unaudited)
ERI GM Mastering Proforma Total
--- -- --------- -------- -----
Adjustment
----------
<S> <C> <C> <C> <C> <C>
Operating Revenues... $ 6,971 $ 2,519 $ 6,754 $ (600)(a) $15,644
======= ======= ========= ============ =======
Net Income.............. $ (14) $(150) $ (568) $ - $ (732)
======= ====== ========= ============ =======
</TABLE>
(a) Proforma adjustment to eliminate revenue recorded by ERI for consulting
services provided to Mastering Computers by ERI under a contract entered
into in May 1996.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(Unaudited)
ERI GM Mastering Total
--- -- --------- -----
<S> <C> <C> <C> <C>
Operating Revenues.... $ 2,800 $2,747 $ 5,233 $10,780
======== ====== ========== =======
Net Income.............. $(1,472) $ 154 $ 440 $ (878)
======== ====== ========== =======
</TABLE>
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EAGLE RIVER INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. INITIAL PUBLIC OFFERING
In March 1996 the Company completed an initial public offering of 4,000,000
shares of its common stock at a price of $13.00 per share. After underwriting
discounts, commissions and other offering expenses, net proceeds to the Company
from the offering were $46,933,000. Upon the closing of the offering, all
1,342,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock
("Series A Preferred Stock") outstanding were converted into 4,026,000 shares
of common stock.
In addition, the terms of the Series A Preferred Stock provided that accrued
dividends were not payable upon conversion of the Series A Preferred Stock if
the market price of the common stock at the time of such conversion exceeded
$5.00 per share. At the conversion date, $336,342 in Series A Preferred Stock
dividends had been accrued. These accrued dividends were restored to additional
paid-in capital upon the closing of the initial public offering at which time
the market price of the common stock on the date of conversion was the initial
public offering price of $13.00 per share.
In April 1996, the underwriters of the Company's initial public offering
exercised their over-allotment option and purchased an additional 309,000
shares of common stock at $13.00 per share from the Company, with net proceeds
to the Company aggregating $3,735,810.
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Consistent with the Registration Statement, the Company has utilized the
provisions of the Commission's Staff Accounting Bulletin No. 83. Common stock
and common stock equivalent shares issued by the Company at prices
significantly below the public offering price during the twelve month period
prior to the offering date (March 21, 1996) have been included in the
calculation on a pro forma basis. The shares would be included as if they were
outstanding through the period ended September 30, 1995 using the treasury
stock method at a price of $13.00 per share, the initial public offering price.
5. INCOME TAXES
Through March 31, 1996, the Company provided a valuation allowance to fully
offset its net deferred tax asset, which consisted substantially of net
operating losses. Such net operating losses were primarily the result of the
Company's investment in infrastructure to significantly expand its business
and, to a much lesser degree, losses from its outdoor media business. During
the quarter ended June 30, 1996, as required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), the
Company reviewed the realization of its deferred tax asset, and as a result of
this review, reversed a portion of the valuation allowance totaling $795,000
including $40,000 relating to discontinued operations. This reversal was
based on management's determination that the deferred tax asset will be
realized, on a more likely than not basis, as a result of the Company's future
years operations.
GM and Mastering were S corporations for federal and state income tax purposes
prior to merging with ERI on June 21, 1996 and July 31, 1996, respectively.
Accordingly, GM and Mastering were not subject to income tax, as all taxable
income or loss for GM and Mastering was reported in the tax returns of its
shareholders for the period from inception through their respective merger
dates. Upon merger with the Company, net deferred tax assets of $78,000 and
$125,000 relating to GM and Mastering, respectively, were recorded by the
Company.
During the quarter ended September 30, 1996, the Company recorded an income tax
benefit of $1.9 million, net of a $.5 million valuation allowance. In
accordance with SFAS 109, management of the Company determined that it is more
likely than not that the net deferred tax asset of approximately $2.7 million
as of September 30, 1996 will be realized in the foreseeable future based on
future years operations and management's expectations relating to its current
business model and forecasts. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the Company's loss carryforward period are reduced.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of Eagle
River Interactive's (the "Company's") financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Condensed Financial Statements and notes thereto.
Overview
The Company creates, develops and deploys interactive solutions that assist
companies in sales, marketing, training and corporate communications. The
Company develops these business solutions through the use of custom and
product solutions. Custom solutions are delivered using the Internet and World
Wide Web, informational and transactional kiosks, CD- ROMs, and other
interactive medium. Product solutions are generated by providing
instructor-led Windows NT and Windows 95 operating system training seminars and
on-site workshops, computer-based training media, interactive software, videos
and newsletters. The Company also offers traditional outdoor media advertising
at ski resorts in the United States.
The Company's operations are subject to certain risks and uncertainties
including, among others, a limited operating history, substantial operating
losses, management's plan for rapid growth, rapidly changing technology, and
potential competitors with greater technical and marketing resources. See "Risk
Factors--Risks Relating to the Company--Limited Operating History; Net Losses;
Accumulated Deficit," "Management of Growth; Risks Associated with Expansion"
and "Certain Transactions" included in the Company's Registration Statement.
Mergers
On June 21, 1996, the Company completed a merger with Graphic Media, Inc.
("GM"). Pursuant to the merger, all outstanding GM shares were converted into
550,000 shares of Eagle River Interactive, Inc. ("ERI") common stock. The
merger was accounted for as a pooling of interests, and accordingly the
following historical financial information has been restated as though ERI and
GM had been combined from inception.
On July 31, 1996, the Company completed a merger with Mastering Computers, Inc.
("Mastering"). Pursuant to the merger, all outstanding Mastering shares were
exchanged for an aggregate of 1,175,000 shares of ERI common stock. The
Company also assumed and exchanged all options to purchase Mastering common
stock for options to purchase 191,280 shares of the Company's common stock.
The merger was accounted for as a pooling of interests, and accordingly the
Company's consolidated historical financial information has been restated as
though ERI and Mastering had been combined from inception. The Company also
assumed and exchanged all options to purchase GM common stock for options to
purchase 141,041 shares of ERI common stock.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
General
The Company has three revenue sources--outdoor media advertising, custom
solution services and product solutions. The Company sells outdoor media at ski
areas to advertisers for a specific period of time, generally November through
April, which approximates the ski season. The Company recognizes this revenue
ratably over the period the media are provided to the customer. In some cases,
the Company produces the advertising content in addition to selling the media
to its customers. In such cases, the production revenue is recognized when the
production work is completed. In addition, the Company provides promotional
services related to events sponsored by various advertisers throughout the ski
season. Promotion revenue is recognized as the events are held, primarily in
January through March.
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<PAGE> 10
The Company generates revenue from custom solution services, primarily through
fixed-fee contracts. The Company's custom solution customers generally retain
the Company on a project-by-project basis. The Company has no material contract
that commits any customer to use the Company's services on a long-term basis.
Custom solution service contracts are generally completed within three to nine
months. Custom solution revenue is recognized using the percentage of
completion method on an individual contract basis. Percentage complete is
determined based upon the ratio of costs incurred to total estimated costs. The
Company's use of the percentage of completion method of revenue recognition
requires estimates of the degree of project completion. To the extent these
estimates prove to be inaccurate, the revenues and gross profits, if any,
reported for periods during which work on the project is ongoing may not
accurately reflect the final results of the project, which can only be
determined upon project completion. Provisions for any estimated losses on
uncompleted contracts are made in the period in which such losses are
determinable.
The Company generates revenue from sales of products, which consist primarily
of Windows NT and Windows 95 operating systems training seminars and workshops,
computer-based training media interactive software and videos and newsletter.
Product solution revenue from seminars is recognized upon completion of the
seminar. Subscription revenues are deferred and recognized over the term of
the related subscription while other product revenue is recognized when the
products are shipped.
Costs related to the Company's outdoor media sales include primarily sales and
operating expenses, sign installation and maintenance costs (which are
recognized as incurred on an accrual basis) and tower and transit rental costs
(which are recognized ratably over the November to April ski season to coincide
with the period over which related revenue is recognized). Costs related to
custom solution services consist primarily of labor and occupancy expenses for
creative design, account management and sales personnel. Cost of revenue for
product solutions primarily consist of labor and related benefits for speakers
and seminar personnel, seminar facilities and materials provided to seminar
participants, some of which is deferred until seminar completion. Failure to
expand any of the foregoing areas in an efficient manner could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, there can be no assurance that the Company's revenues
will continue to grow at a rate that will support its increasing expense
levels.
Revenue
Revenue for the three months ended September 30, 1995 (the "1995 Quarter") was
approximately $4.1 million, which consisted of approximately $1.7 million of
custom solutions revenue and approximately $2.4 million of product solutions
revenue. Revenue for the three months ended September 30, 1996 (the "1996
Quarter") was approximately $9.9 million, or a 144% increase over the 1995
Quarter. The 1996 Quarter consisted of approximately $4.2 million of custom
solution revenue and approximately $5.7 million of product solution revenue.
The growth in custom solution revenue from the 1995 Quarter to the 1996 Quarter
was a result of the increase in the number of projects from both new and
existing customers. The growth in product solutions revenue from the 1995
Quarter to the 1996 Quarter was a result of the increase in the number of
seminars provided, the average number of attendees per seminar and the average
price charged for the seminars. Due to the seasonality of outdoor media
advertising, there was no such revenue recognized during the 1995 and 1996
Quarters.
Cost of Revenue
The Company's cost of revenue for the 1995 Quarter consisted of approximately
$1.7 million related to custom solution services and approximately $.7 million
related to product solutions. The Company's cost of revenue for the 1996
Quarter consisted of approximately $5.2 million related to custom solution
services and approximately $1.4 million related to product solutions.
During the first and second quarters of 1996 and for part of the third quarter
of 1996, costs increased in all areas of the custom and product solution
segments, particularly in labor and related benefits, and occupancy costs. The
Company anticipates increases in cost of revenue to be less dramatic for the
remainder of 1996. The Company has made substantial investments in its labor
force and operating infrastructure and anticipates increased capacity and
production through higher utilization of its labor force, some of which has
already taken place in the 1996 Quarter.
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<PAGE> 11
Sales and Marketing
Sales and marketing costs are primarily comprised of salaries and benefits,
travel and marketing program costs. Sales and marketing expenses of
approximately $1.4 million for the 1995 Quarter were primarily related to the
continued development of the Company. For the 1996 Quarter sales and marketing
expenses were approximately $3.6 million. The increase from the 1995 Quarter
to the 1996 Quarter was primarily due to the growth of the Company's business
and the corresponding increase in personnel.
General and Administrative Expenses
General and administrative expenses include costs related to senior executives
of the Company as well as costs for legal, accounting, information systems and
human resource functions. These costs are primarily comprised of salaries and
benefits, travel and occupancy costs. General and administrative expenses of
approximately $1.0 million during the 1995 Quarter were primarily related to
the continued early development of the Company. For the 1996 Quarter, general
and administrative expenses were approximately $4.4 million, which includes
approximately $1.7 million of costs related to the merger with Mastering and
the related organizational realignment following the merger. The Mastering
merger expenses primarily consist of consulting, outside legal and accounting
costs. The increase from the 1995 Quarter to the 1996 Quarter not attributable
to the merger and related organizational realignment was primarily due to the
growth of the Company's business and the corresponding increase in the number
of executive and administrative personnel and the number of offices. The
Company anticipates that increases in general and administrative will be less
dramatic for the remainder of 1996. In addition, these costs as a percentage
of revenue should decrease as the administrative infrastructure is
substantially in place to meet anticipated growth in operations.
Depreciation and Amortization
Depreciation and amortization expense of approximately $.3 million during the
1995 Quarter consisted of approximately $.15 million of depreciation of
equipment and approximately $.15 million of amortization of organization costs
and goodwill related to acquisitions. For the 1996 Quarter, depreciation and
amortization expense of approximately $.6 million consisted of approximately
$.5 million of depreciation and approximately $.1 million of amortization. The
increase in depreciation expense reflects the significant investment the
Company has made in its computer and office equipment over the past year.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $.2 million for the 1995 Quarter primarily represents
interest expense. Other income of approximately $.5 million for the 1996
Quarter primarily represents interest income which was the result of investing
the proceeds from the initial public offering.
Income Taxes
The Company recorded an income tax benefit of $1.9 million, net of a $.5
million valuation allowance, in the 1996 Quarter. In accordance with the
provisions of SFAS 109, management of the Company determined that it is more
likely than not that the net deferred tax asset resulting from the Company's
net operating loss for the three months ended September 30, 1996 will be
realized in the foreseeable future based on future years operations.
The Company's custom solution revenue increased from $1.7 million in the 1995
Quarter to $4.2 million in the 1996 Quarter, representing a 147% increase in
revenue quarter over quarter, which is consistent with the growth in the custom
solutions revenue achieved in the quarter ended June 30, 1996. In addition,
such revenue increased from $2.9 million in the first quarter of 1996 to $4.2
million in the third quarter of 1996 representing a 45% increase in revenue.
Further, the Company's management continues to believe that the increases in
margins achieved by its outdoor media business in future periods will be
substantially larger than those achieved in 1995 (11%) and similar to those
achieved in the quarter ended March 31, 1996 (36%). Based on the above
operating results and management's expectations relating to its current
business model and forecasts, it is management's belief that it is more likely
than not that the net deferred tax asset will be realized.
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<PAGE> 12
Historically, the Company's net income (loss) before taxes has approximated its
taxable income (loss). The Company's deferred income taxes result primarily
from the use of accelerated depreciation methods for income tax purposes,
amortization differences relating to certain intangible assets, net operating
loss carryforwards ("NOLs") and certain amounts accrued for book purposes which
are not deductible for income tax purposes until paid. The Company has tax
NOLs totaling $5.9 million, which expire as follows: 2010-$.6 million and
2011-$5.3 million.
Management believes that taxable income during the carryforward period will be
sufficient to utilize fully the NOLs before they expire. Management anticipates
that increases in taxable income during the carryforward period will arise
primarily as a result of the Company's continued growth in the interactive
industry and operating efficiencies which may be gained under the Company's
current strategies.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenue
Revenue for the nine months ended September 30, 1995 was $14.8 million, which
consisted of approximately $4.5 million of custom solution revenue,
approximately $7.6 million of product solution revenue and $2.7 million of
outdoor media and promotion revenue. Revenue for the nine months ended
September 30, 1996 was approximately $25.6 million, or a 72% increase over the
nine months ended September 30, 1995. Revenue for the nine months ended
September 30, 1996 consisted of approximately $11.1 million of custom solution
revenue, approximately $11.9 million of product solution revenue and $2.6
million of outdoor media and promotion revenue. The growth in revenue was
primarily the result of the increase in the number of interactive projects
performed and the number of seminars provided.
Cost of Revenue
The Company's cost of revenue for the nine months ended September 30, 1995
consisted of approximately $3.2 million related to custom solution services,
approximately $2.5 million related to product solutions and approximately $2.4
million related to the outdoor media and promotion business. The Company's
cost of revenue for the nine months ended September 30, 1995 consisted of
approximately $10.3 million related to custom solution services, approximately
$3.0 million related to product solutions and approximately $1.7 million
related to the outdoor media and promotion business.
During 1995, the Company was developing its business. During 1996, costs
increased in all areas of the custom and product solution segments,
particularly in labor and related benefits, and occupancy costs. The Company
anticipates increases in cost of revenue to be less dramatic for the remainder
of 1996. The Company has made substantial investments in its labor force and
operating infrastructure and anticipates increased capacity and production in
future quarters through higher utilization of its labor force, some of which
has already taken place.
Sales and Marketing
Sales and marketing costs are primarily comprised of salaries and benefits,
travel and marketing program costs. Sales and marketing expenses of
approximately $3.8 million for the nine months ended September 30, 1995 were
primarily related to the continued development of the Company. For the nine
months ended September 30, 1996, sales and marketing expenses were
approximately $8.6 million. The increase from 1995 to 1996 was primarily due
to the growth of the Company's business and the corresponding increase in
personnel.
General and Administrative Expenses
General and administrative expenses include costs related to senior executives
of the Company, as well as costs for the accounting, information systems and
human resource functions. These costs are primarily comprised of salaries and
benefits, travel and occupancy costs. General and administrative expenses of
approximately $3.1 million during the nine months ended September 30, 1996 were
primarily related to the continued early development of the Company. For the
nine months ended September 30, 1995 general and administrative expenses were
approximately
-12-
<PAGE> 13
$8.1 million, which includes approximately $2.2 million of costs related to the
Mastering and GM mergers and related organizational realignment following the
mergers. The merger expenses primarily consist of consulting, outside legal and
accounting costs. The increase from the nine months ended September 30, 1995 to
the nine months ended September 30, 1996 was primarily due to mergers and
related organizational realignment and the growth of the Company's business and
the corresponding increase in the number of executive and administrative
personnel and the number of offices. The Company anticipates that increases in
general and administrative will be less dramatic for the remainder of 1996. In
addition, these costs, as a percentage of revenue, should decrease as the
administrative infrastructure is substantially in place to meet anticipated
growth in operations.
Depreciation and Amortization
Depreciation and amortization expense of approximately $.7 million during the
first nine months of 1995 consisted of approximately $.35 million of
depreciation of equipment and approximately $.35 million of amortization of
organization costs and goodwill related to acquisitions. For the first nine
months of 1996, depreciation and amortization expense of approximately $1.4
million consisted of approximately $1.1 million of depreciation and
approximately $.3 million of amortization. The increase in depreciation expense
reflects the significant investment the Company has made in its computer and
office equipment over the past year.
Other Income (Expense)
Interest income and expense are included in other income (expense). Other
expense of approximately $.5 million for the first nine months of 1995
primarily represents interest expense. Other income of approximately $1.2
million for the first nine months of 1996 primarily represents interest income
which was primarily the result of investing the proceeds from the initial
public offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in the Company's operating activities was approximately $2.2
million for 1995 primarily due to the Company's payment and fulfillment of
obligations acquired from the predecessor to SkiView. For 1996, approximately
$7.6 million of cash was used in operations. Cash used in operations for 1996
largely reflects the investment made by the Company to grow its operating
infrastructure. Cash used in investment activities was approximately $2.2
million and $5.9 million for 1995 and 1996, respectively, related primarily to
purchases of property and equipment in both years and to the rapid staffing
growth and office space expansion in 1996. Cash flows from financing activities
were approximately $5.6 million and $46.2 million in 1995 and 1996,
respectively. In 1995, the Company financed its operations, acquired equipment
and met its working capital requirements through a preferred stock issuance and
borrowings under lines of credit issued by certain affiliates. The cash inflow
from financing activities for 1996 reflects the completion of the initial
public offering of common stock.
The Company believes that the net proceeds from its initial public offering
will be sufficient to meet its currently anticipated cash needs for working
capital, capital expenditures and any funds required to make acquisitions, if
any, for the foreseeable future.
FUTURE RESULTS
This report may be deemed to contain forward-looking statements which are
subject to risks and uncertainties that could cause actual results to differ
materially from those anticipated, including, but not limited to, the Company's
limited operating history and substantial operating losses, risks associated
with the expansion of the Company's business and the management of growth,
dependence on key personnel, potential fluctuations in quarterly operating
results, absence of long-term contracts, the rapidly evolving market for
interactive services, uncertain demand and market acceptance for interactive
solutions, rapidly changing technology and the competitive environment. These
risks and uncertainties are described more fully under the heading "Risks
Factors" in the Company's Prospectus dated March 21, 1996 included in the
Registration Statement.
- 13 -
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 31, 1996, the Company issued 1,175,000 shares of common stock to Thomas
R. Graunke in exchange for all of the outstanding shares of capital stock of
Mastering Computers, Inc. No underwriter was involved in the transaction, and
the securities were issued in reliance on the private offering exemption set
forth in Section 4(2) of the Securities Act of 1933 and on analogous provisions
contained in applicable state securities laws on the basis that the securities
were issued under circumstances not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
On July 8, 1996, the Company filed a Current Report on Form 8-K, dated
June 21, 1996, reporting, under Item 2 of the form, the merger of a
wholly owned subsidiary of the Company with and into Graphic Media,
Inc. On September 6, 1996, the Company filed an amendment to this
Form 8-K to include, under Item 7 of the form, audited financial
statements of Graphic Media, Inc. for the two years ended December 31,
1995.
On August 15, 1996, the Company filed a Current Report on Form 8-K,
dated July 31, 1996, reporting, under Item 2 of the form, the merger
of a wholly owned subsidiary of the Company with and into Mastering
Computers, Inc. On October 16, 1996, the Comany filed an amendment to
this Form 8-K to include, under Item 7 of the form, audited financial
statements of Mastering Computers, Inc. for the three years ended
December 31, 1995.
- 14 -
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE RIVER INTERACTIVE, INC.
Date: November 14, 1996
/s/ TERENCE M. GRAUNKE
Terence M. Graunke
Chairman, President and Chief
Executive Officer
Date: November 14, 1996
/s/ MARC PINTO
Marc Pinto
Executive Vice President,
Chief Financial Officer
- 15 -
<PAGE> 16
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ----------- -------------
27 Financial Data Schedule
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 35,333,000
<SECURITIES> 0
<RECEIVABLES> 4,749,000
<ALLOWANCES> 192,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,999,000
<PP&E> 10,105,000
<DEPRECIATION> 2,395,000
<TOTAL-ASSETS> 57,293,000
<CURRENT-LIABILITIES> 6,959,000
<BONDS> 1,192,000
0
0
<COMMON> 13,000
<OTHER-SE> 49,129,000
<TOTAL-LIABILITY-AND-EQUITY> 57,293,000
<SALES> 0
<TOTAL-REVENUES> 25,557,000
<CGS> 0
<TOTAL-COSTS> 33,109,000
<OTHER-EXPENSES> 94,000
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 77,000
<INCOME-PRETAX> (6,390,000)
<INCOME-TAX> 2,624,000
<INCOME-CONTINUING> (3,766,000)
<DISCONTINUED> 198,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,568,000)
<EPS-PRIMARY> (.30)
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